We are witnessing a major shift in monetary policy: against all expectations, the European Central Bank (ECB) decided, last month, to boost its Quantitative Easing (QE) by 20 billion euros per month (our article), while last week, the Federal Reserve (Fed) decided to do the same, at 60 billion dollars per month - at least until the second quarter of 2020. The "return to normal" seems to be moving further away and investors are increasingly doubtful and worried about the monetary authorities.
According to the Fed, this should not be seen as a new QE because it is only a purchase of short-term (less than one year) Treasury bonds, without any intention, therefore, to influence long-term interest rates. What a joke! Such a quantity of purchases concentrated on short maturities will certainly influence rates beyond one year, and above all it reflects a strong need for liquidity on the part of banks... But why; is there a problem? Yes, and we know that since mid-September, the Fed has been involved in the repo market, precisely to provide liquidity to the banking system. It will continue to intervene on repo market, at least until the end of January 2020. But this is not enough, hence the reactivation of the QE.
In addition, this new QE will have the advantage of lowering short-term rates and thus restoring a normal yield curve (short-term rates lower than long-term rates, because the risk is lower in the short term than in the long term). But this standardization will be achieved by the artifice of the printing press... Welcome to the centralized economy.
While we should get out of accommodative monetary policies, which the Fed had started to do, while we should let interest rates rise in order to get out of negative rates, while central banks should let market forces do, the opposite is happening before our eyes. However, there is no crisis on the horizon (as in 2008, or in 2011 in Europe with sovereign debt), only an economic slowdown in Europe, or the central banks know things that we don't know....
It is the banking sector that is of concern on both sides of the Atlantic. Zero rates help deficit countries, but they lead to bank accounts being strained. In this game, European banks are in a much worse position because they are less profitable and less capitalized than their American counterparts. The crisis is brewing, hence the reaction of the central banks.
But in this rather gloomy picture, the Dutch central bank surprised, stating in an official publication that "if the system collapses, the gold stock can serve as a basis to build it up again. Gold bolsters confidence in the stability of the central bank's balance sheet and creates a sense of security." Finally, a little common sense! But the formula sounds like a warning and those who will not have physical gold- both central banks and individuals- will face very difficult times.
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